Energy Management Resources Reports on the Volatility of Natural Gas Prices

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Shale continues to take center stage, albeit with mixed opinions, which is adding volatility to the direction of natural gas prices.

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The new drilling technologies that have proved so successful for natural gas may now provide an impact on the world oil supply

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EMR – Based on last months New York Mercantile Exchange (NYMEX), Natural Gas prices are holding between $4.20 to $4.30 per MMBtu. Many factors come into play with when pricing commodities on NYMEX; however, all eyes continue to focus on the game changer – Shale Gas. Energy Management Resources is seeing a lot of clients re-analyze their hedging strategies as a result.

Shale continues to take center stage, albeit with mixed opinions, as compared to previous robust projections. These mixed opinions are adding some volatility to the direction of natural gas prices. Yet, it looks like North American producers are scaling back due to economics.

Here are the some facts regarding the economics of shale gas:

  •     There are 2,300 drilled but yet to be completed wells in the Haynesville, Marcellus, Eagle Ford and Barnett plays alone. As a result, producers have an inventory position whose cost structure will continue to put price caps on future price increases.
  •     There are potential environmental hazards that can be associated with the process of drilling for shale gas. Consequently, larger investments may be needed to deal with any new regulatory oversight and unanticipated regulations.
  •     Storage and pipeline capacity limits are being tested, as U.S. dry natural gas production is expected to grow by about 5.4 Bcf/d through 2015 from the 2010 average.

What some know about this game-changer is that the new drilling technologies that have proved so successful for natural gas may now provide an impact on the world oil supply. Oil brings much higher returns than gas, so many investors have already begun to pressure Boards of Directors about their investments. While debt rollovers, new equity offerings, and asset lease sales have financed the shale gas boom, disappointing cash flows are leading some investors to jump off the bandwagon. A thousand cubic feet (Mcf) of U.S. natural gas once sold for a tenth of the price of a barrel of oil, but now that spread has widened tremendously – One (1) Mcf of gas now sells for a twentieth, or less, of the price of a barrel of oil. Major shale producers see today's gas prices making the economics of shale gas, as well as conventional gas, increasingly unprofitable. Weak cash flows have spurred investor concerns that these companies may no longer be able to meet wellhead break-even costs at those prices.

  •     Chesapeake Energy Corporation announced they had decided to sell all of its Fayetteville Shale assets and its equity investments in Frac Tech Holdings, LLC and Chaparral Energy, Inc.
  •     Chesapeake also announced ramped up investments at the Niobrara oil/shale formation, primarily an oil play, situated in northeastern Colorado and parts of Wyoming, Nebraska, and Kansas.
  •     Voyager Oil & Gas has made similar investment decisions. It will reduce production in its Bakken shale formation and refocus on its Niobrara fields.
  •     In response to deteriorating, if not negative profit margins, other shale gas producers are suddenly redeploying their rigs to drill for more lucrative oil. That includes the likes of Petrohawk Energy Corporation, EOG Resources, Forest Oil Corporation, and Quicksilver Resources.

Low natural gas prices are the result of many factors and the technology behind shale gas is seen as the central game changer, as it may assume a similar role in oil exploration. Although the potential environmental impacts of producing shale gas are being questioned, shale gas producers are redeploying their drilling dollars to oil targets searching for higher returns. According to Baker Hughes last week, the number of natural gas rigs operating in the US fell for a fifth consecutive week to a ten-month low. By shifting from gas to oil, the technology has lifted hopes of the first significant rise of onshore U.S. oil production in decades. In five to eight years, the technology could add a million barrels of oil a day to U.S. supplies.

Analysts stress the importance of this switch in exploration activity. Moving from shale gas to oil won't be without consequences for future gas supply, as the effect of more rigs drilling for oil will have an impact gas prices. The oil exploration industry has already moved to riskier finds, such as Alberta tar sands and deep-water drilling. There probably isn't a whole lot of “easy oil” left to find. Thus, the oil industry thinks it can benefit from the shale gas technology developed by its siblings in the natural gas sector.

About Energy Management Resources:
Energy Management Resources (EMR) helps energy intensive industrial and commercial companies across North America optimize their energy requirements. The costs, risks and regulatory issues associated with high demand energy consumption are complex. We take the complexity out of the equation to reduce your operating expense and manage your company's risk.

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Paul Van Erem